The U.S. Justice Department said it had told Google that it planned to file a lawsuit to block the Yahoo and Google search advertising deal on antitrust grounds. Google decided, to Yahoo's disappointment, that it would not pursue the deal any further.

Yahoo expressed dismay at Google's decision, saying it was
"disappointed that Google has elected to withdraw from the agreement
rather than defend it in court."

The U.S. Justice Department, in a statement issued on Wednesday,
said it had told Google that it planned to file a lawsuit to block the
deal on antitrust grounds.

"Had the companies implemented their arrangement, Yahoo's
competition likely would have been blunted immediately with respect to
the search pages that Yahoo chose to fill with ads sold by Google
rather than its own ads," the Justice Department said.

Google shares were down 2.05 percent in late-morning trade at
$359.30, while Yahoo was up 4.34 percent at $13.93. Both are traded on
the Nasdaq market.

Google and Yahoo, Nos. 1 and 2 in the Internet search market,
announced the planned partnership in June but delayed implementation to
allow the Justice Department to scrutinize it for antitrust issues.

Google said it pulled out of the deal rather than face a protracted legal fight.

"After four months of review, including discussions of various
possible changes to the agreement, it's clear that government
regulators and some advertisers continue to have concerns about the
agreement," the Google legal officer, David Drummond, said in his
Internet posting.

"We're of course disappointed that this deal won't be moving ahead," he said.

Between them, Google and Yahoo had more than 80 percent of the web search market in August, according to comScore Inc.

In some ways, Google's decision to scrap the deal comes as a
surprise. In August, Google Chief Executive Eric Schmidt said the
company would move forward with the partnership in October, with or
without approval from the Justice Department.

Advertisers -- who apparently had the ear of regulators -- hotly
opposed the deal, arguing that Google and Yahoo's dominance of the
market could mean they would rise prices.

Part of the impetus for Google's decision could be Yahoo's talks on
buying the content and advertising operations of Time Warner Inc's AOL
unit. Yahoo initially struck a deal with Google as a way to fend off an
unsolicited takeover bid from Microsoft Corp.

There had been hints that the Justice Department was prepared to
challenge the Google-Yahoo deal: The department hired litigator Sandy
Litvack to work on its probe of the agreement.

Litvack was the department's antitrust chief under President Jimmy Carter.

The department's decision to hire Litvack was unusual, antitrust
experts said, recalling the department's hiring of David Boies as
outside counsel for its antitrust case against Microsoft.

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